THE GREAT American home-appreciation money machine is showing some hints of slowing down, but for most consumers around the country, a house is still by far their best-performing asset.
The federal government's latest quarterly study of home price appreciation shows that the average American house grew in resale value by 6.48 percent from the first quarter of 2002 through the first quarter of this year.
Houses in six states and the District of Columbia continued to appreciate at recession-defying double-digit rates. More than 40 major metropolitan areas reported double-digit year-to-year jumps in values - a performance that is considered stunning by mortgage industry economists who predicted much lower rates in a weakening domestic economy.
Hottest-growth states in the latest study by the Office of Federal Housing Enterprise Oversight (OFHEO): Rhode Island, where the average home gained 14.6 percent in value from the first quarter of 2002 to the first quarter this year; the District of Columbia (counted as a state in the study), where values were up 12.3 percent; California (up an average 11.23 percent). Next were New Jersey (10.55 percent), Florida (10.18 percent) and New York (10.09 percent). Maryland was ninth at 9.79 percent. Some individual metropolitan housing markets showed gains reminiscent of the go-go late 1990s - as high as 15 percent in San Diego and Nassau-Suffolk on New York's Long Island. (The full OFHEO Housing Price Index report, with data for 220 metropolitan areas, can be viewed at www.ofheo.gov.)
The majority of houses nationwide gained in value at more modest rates - and the most recent national annualized quarterly rate was just 3.8 percent, down from 5.2 percent the previous quarter. But the full-year 6.48 percent average impressed housing economists, who had assumed rising unemployment and overseas shocks would put a brake on appreciation rates in most places. "We had projected [an average] 4 percent for existing [resale] houses," said Douglas Duncan, chief economist of the Mortgage Bankers Association of America.
Undoubtedly contributing to the better-than-anticipated performance: today's 45-year lows in mortgage rates. With 30-year loans close to 5 percent and 15-year mortgages in the 4 percent range, "there is no question," said Duncan, that there is a connection between the cost of borrowing and current rates of housing inflation.
Bargain-rate mortgages allow buyers to afford a costlier home, and allow sellers to ask - and get - higher prices. For example, a consumer with roughly $1,320 a month to spend on principal and interest can afford a $200,000 fixed-rate 30-year mortgage at 7 percent, a $220,000 mortgage at 6 percent, and a $250,000 loan at 5 percent. That 25 percent jump in affordable mortgage amount produced by just a 2 percentage-point drop in the cost of money gets factored into a home's price tag by the alchemy of the free market.
Short-term gains in value may be impressive, but the year-in, year-out performance of homes has caught the eye of mortgage economist Frank Nothaft of Freddie Mac. During the past five decades, he says, the average American single-family house has appreciated at between 4 percent and 5 percent annually. That includes national recessionary downturns and severe regional declines - the Southwest in the 1980s energy bust, and Southern California in the early 1990s - where home values deflated for a few years only to bounce back later and recoup those losses.
The latest OFHEO study shows that the average American home grew in value by 38 percent during the past five years - slightly above Nothaft's historical norms. On a state-by-state basis, however, houses often have far outdistanced the national average gains.
The average Massachusetts home appreciated by 73 percent in the past 60 months, according to OFHEO. The average California home is up 68 percent during the same period. The average home in the District of Columbia - tops in the country - is up by 78 percent over five years. Maryland is up 38.59 percent during that time.
Doom and gloom "bubble" theorists, who predict a sharp downturn in housing values after such effervescent inflationary bursts, won't find much to support their case in the latest OFHEO statistics. For example, two of the highest-cost, highest-inflation markets of the late 1990s - San Francisco and San Jose - had been projected as home-value disaster areas in the wake of local economic reverses. But both are still turning in annual gains.
In metropolitan San Francisco, where a starter home can set you back $600,000, houses appreciated at 5.53 percent in the past year. In San Jose, epicenter of the dot-com implosion, gains averaged 4.52 percent.
None of this is to suggest that the potential for housing deflation has been wrung out of the American economy, especially in markets where unemployment takes a big jump. Low interest rates can't prop up home values when breadwinners aren't bringing home the bread. But in most markets, that's simply not happening.
Ken Harney's e-mail address is firstname.lastname@example.org.